Sunday, August 21, 2016
Late on Aug. 3, after a debate lasting almost eight hours, Indian lawmakers approved plans for a major economic overhaul to turn the country into one unified market in which businesses can trade goods and services across state lines without having to navigate a prohibitive array of federal and local taxes. In what has been billed as the most significant reform since India opened up its economy in 1991, the measure is aimed at sweeping away a maze of levies that have hampered economic growth by making it harder for businesses to expand nationwide.
By simplifying the system, India, already the world’s fastest-growing large economy, could see growth rise by as much as 2%. The successful passage of the so-called Goods and Services Tax (GST) bill is a big win for Prime Minister Narendra Modi, who has been criticized for not doing enough to reform India’s economy since he came to power in 2014. Here is what you need to know about the landmark reform.
I owned Indian stocks about a year ago but sold them for a profit as the initial euphoria over Modi's election wore off and change seem to be stalled. However this is pretty big news and although it will take some time in implementing this is the type of change that liberalizes an economy and allows it to become unshackled and to grow.
The reason I find this news worthy is that India is very close to becoming the new China as far as growth and commodity consumption are concerned. India is a democracy and has other issues that China does not have but it is growing around 7% and if the country continues to liberalize than we should even more growth and infrastructure spending as the country is way behind in this category.
For the first quarter 2016 India’s GDP grew by an astounding 7.9%, which was an impressive 60-basis-point increase over the 7.3% year-over-year growth reported for 2015. Such impressive economic growth now sees India on track to exceed the 7.5% forecast by the IMF for 2016.
This highlights that India’s economy is growing at a faster rate than China’s. For 2015 China’s GDP growth slowed to 6.9%, which was its lowest level in 25 years. Then on top of this, its GDP growth for the first and second quarters 2016 fell even further to only 6.7%, its slowest rate of quarterly growth since the global financial crisis.
Secondly, the lack of investment in India’s mining sector, along with a shortage of vital commodities such as coking coal, is expected to drive significantly higher demand for imports.
We will not see the same type of boom we saw from China. Nevertheless after a five year bear market the increased demand from India and other SE Asia countries (Vietnam, Thailand, Indonesia) could reignite the embers of a depressed commodity market.